Long Term Bonds Have An Attractive History…But

The DEX Long Term Bond Index has posted an annualized return of 10.92% from January 1980 until October 31st, 2008. This is almost 2% higher than Canadian stocks during this time, and it did this with about two-thirds the volatility! Sounds like a compelling argument for just sticking to long term bonds…

…however, consider where interest rates were in the early 1980’s (around 20%!). The last 28 years has basically seen a long-term decline in interest rates. Bond prices rise in a falling interest rate environment and long-term bonds rise in price even more quickly than short- and mid-term bonds. So before you go out and purchase a long term bond index, take some time to think if interest rates will have the same trend over the next 28 years, because it’s possible that long term bonds could have some decidely unattractive returns over long time horizons going forward if interest rates slowly creep up during this time.

The first question is, what’s the real return? In the early years it can’t have been too good. If you did get a 30-year bond when rates were high and keep it as inflation fell it could turn out well.

geneNovember 19th, 2008 03:15 PM

Yes indeed. The fall in interest rates was also good for stocks. Going forward, it’s perfectly clear that rates cannot drop much further. You don’t need a Magellan Maestro to see that.

Charles in VancouverNovember 21st, 2008 10:57 AM

But notice also that long government bonds have gone up while in the recent credit crisis, long corporates have shot down. So if you’re going to buy bonds now, stick to shorter government bonds and consider finding undervalued corporates with attractive yields.